November 20, 2012 / 3:20 PM / 7 years ago

YOUR PRACTICE: Gift tax options for procrastinators

Nov 20 (Reuters) - Tax bills on big gifts are set to increase substantially at year’s end, and that means the timing couldn’t be better to pass on a gift. Th e challenge now? Time.

With just six weeks left until the end of 2012, developing a flexible and legally solid estate plan needs to be done quickly.

Americans have been able to gift up to $5.12 million tax free this year, up slightly from 2011. At year’s end, that lifetime gift-tax exemption will be slashed to $1 million. What’s more, tax rates on gifts above the exemption level are set to shoot to as high as 55 percent from a current rate of 35 percent.

Congress may act to soften the blow , but estate planning experts say the current tax situation presents the opportunity of a lifetime for giving. However, financial advisers say many clients waited too long and are now scrambling to plan a gift - at a time when estate planners say they have never been busier.

“It’s been a wave that continues to peak,” said David Levi, senior managing director and estate planner at CBIZ MHM, a nationwide business management consulting firm.

While it is probably too late to set up a complicated giving strategy such as a multi-generational legacy plan funded by illiquid assets, there are trusts that can be set up quickly - an option that gives clients more control than just writing their heirs a check.


Trusts are go-to giving vehicles because benefactors can set rules on when and how heirs can access the money. Plus, the gift is protected from creditors in the event of an heir’s own financial crisis.

A basic irrevocable trust will capture those benefits and can still be set up before the end of the year. However, there are other advanced trusts that are worth considering, also with time left in the year to set up.

One is an intentionally defective grantor trust. This works like a typical trust, but the tax bill on any income earned on the principal is the responsibility of the benefactor.

Why would a gift-giver want the tax bill? It’s a way to give an additional gift to heirs, particularly if the benefactor has maxed out the $5 million limit. Paying the taxes for the recipient increases the gift’s bang for the buck, said Steve Wittenberg, director of legacy planning in the private wealth management division of SEI, an Oaks, Pennsylvania-based financial services firm.

There is also a boilerplate clause in this type of trust that could be crucial for people who want to give an illiquid asset, like a piece of real estate, to the trust, but cannot get an appraisal before Dec. 31. The “right of substitution” clause allows the benefactor to put cash in the trust as a placeholder and later replace it with the other asset after it has been appraised.

Also, consider a spousal access trust. This allows someone to make their partner the beneficiary and gives other heirs access to the money after the spouse has died. Tread carefully here however, because these trusts can be fraught with legal issues, particularly if there is a divorce.

The timing is also good to set up charitable trusts for clients who intend to leave large parts of their estates to charity. It is important for a client to spell out their charitable intentions so if they die unexpectedly, the money goes to the charity before it gets taxed with the estate. Estate taxes are also set to rise next year.


These trusts are all irrevocable, so advisers should be wary of clients rushing to make a gift they can’t really afford. Another danger is that they will cobble together a strategy that could leave the gift unprotected from creditors or open to scrutiny by the IRS.

New York-based Bernstein Wealth Management projects clients’ spending over a lifetime and runs the numbers through 10,000 hypothetical scenarios, which vary based on inflation, rates of return and market conditions.

Those simulations are used to find the core capital a client will need to maintain their lifestyle for as long as they live without running out of money. Surplus beyond that is the only amount the firm recommends for gifting, said Dan Eagan, head of Bernstein Wealth.

For ultra-wealthy clients who will easily hit the $5 million exemption mark, giving more money could be done by simply writing a check, Eagan said. That’s because they may just want to capture the 35 percent tax rate on gifts above the exemption level, before it jumps to up to 55 percent at the end of the year.

Advisers should also keep 2012 in perspective , said Robert Glovsky, vice-chair with The Colony Group, a Boston-based wealth management firm. If a client misses this opportunity to gift, the worst that will happen is their heirs take a tax hit on their inheritance. That’s not ideal, but it is better than making a hasty decision, he said.

“As good as the tax savings may be, always look at the personal first,” Glovsky said.

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